Navigating Term Sheets: Insights for Entrepreneurs Seeking the Right Investment Partner
Last week Atlanta Tech Village held a great session on term sheets with several VCs and a room full of entrepreneurs. Many things were discussed, but here are a few of my takeaways from the conversation.
Choose the right partner
The most important thing is choosing the right investment partner who not only can add value to the business but is the right culture fit. A “better” term sheet from the wrong investor is almost always a worse deal in the long run and extremely difficult to unwind. Do your homework on the investor by talking to other founders who have worked with them (both good and bad outcomes). Also, pay attention to how they treat you in the term sheet process. Are they fair and respectful, or do they treat you poorly and have unrealistic demands they expect you to meet because that is “standard” or “how they have always done it.”
Economic vs. Control terms
There are many terms in a term sheet, and I highly suggest reading Brad Feld’s book Venture Deals: How to be Smarter than your Lawyer or VC for all the details. But at the highest level, most terms are either economic ($ invested, valuation, dividends, preference, etc.) or control (board seats, protective provisions, voting rights, etc.). Many of these terms only matter in bad scenarios. Instead, focus on the ones that matter in the big picture, work collaboratively to get to resolution, and get the deal done with the right partner.
Raising a $250K initial round is very different from raising a $20M Series B round. If you are raising $250K, it’s probably easier to just download a Y Combinator SAFE doc and get investors on board with minimal expense and terms. At a Seed stage, the angels or seed firms will likely issue a basic term sheet. At Series B, a more traditional venture firm will likely issue a more detailed term sheet. Be sure your stage matches the terms being put on the business by the investor.
There are many more nuances to term sheets, but most importantly find the right investor. There are also fundamental decisions to make on what path you want to take for your startup and should you take alternative investment options to fund your business that also inform whether fundraising is right for you.
Here are links to some standard term sheet templates and resources:
Y Combinator standard Series A
National Venture Capital Association (NVCA) templates